Rollover in CGG zinc premium stirs confusion

LONDON  A large European steel mill has secured an effective rollover on 2013 premiums for continuous-galvanizing-grade zinc to be supplied by a major producer in the region in 2014, market sources told AMM sister publication Metal Bulletin.

The deal has resulted in confusion among other producers and traders, who have achieved significant increases on both continuous-galvanizing-grade and special-high-grade zinc premiums in recent weeks.

A second producer, for instance, has secured year-on-year increases of about $30 per tonne on comparable annual continuous-galvanizing-grade deals, consumers, producers and traders said.

While both deals cover significant tonnages, the rollover agreement includes conditions and options to participate in possible falls or rises in premiums that make direct comparisons between them difficult, some observers said.

"There may be some mechanisms in place to follow the market if (SHG) premiums go up, but in my opinion the rollover is a representative market deal," one source at a steel mill said.

Continuous-galvanizing-grade premiums are typically about $25 to $30 higher than special-high-grade premiums, which in the spot market have risen to about $155 to $165 on an f.c.a. Rotterdam cash payment basis, sources said.

Annual deals for continuous-galvanizing-grade zinc have so far been concluded at $170 to $200 per tonne, the mill source said.

Estimates of the size of the European continuous-galvanizing-grade market vary, but the International Lead and Zinc Study Group assumes that consumption of the product accounts for 32.5 percent of overall demand in the European Union, which stood at 2 million tonnes in 2012, according to the groups latest figures.

Many continuous and general galvanizers, which collectively account for more than half of total zinc demand, book contractual tonnages in deals running from April to March.

Nevertheless, steel mills, which use continuous-galvanizing-grade zinc in the production of galvanized sheet primarily sold to the automotive industry, have also now booked significant tonnages in contracts running from January to December, sources said.

The size of the first contract is significant enough to complicate ongoing supply discussions, which have thus far been underpinned by a bullish outlook for regional and global zinc demand, trade and producer sources said.

"This definitely muddies the water in the (continuous-galvanizing-grade zinc) market, because going by market conditions, producers should certainly be capable of getting an increase of $25 to $30," one analyst said.

The rollover agreement also goes against the grain of developments in the special-high-grade zinc market, where premiums have risen strongly in both spot and annual deals signed in the past few months.

Some producers in Europe have agreed to annual special high-grade zinc premiums of $155 to $165 per tonne on an f.c.a. Rotterdam basis, up about $20 from contractual terms seen last year.

Demand for both special-high-grade and continuous-galvanizing-grade zinc is recovering modestly in Europe in line with improving economic conditions, and there has been a year-on-year increase in tonnages booked under annual contracts for 2014, according to trade and producer sources.

Moreover, European consumers of special-high-grade zinc, which is exchange deliverable, also face competition from industrial, trade and financial buyers in the international market, particularly in Asia.

And while the new marketing deal between Noble Group Ltd. and Nyrstar NV (amm.com, Oct. 1) has increased competition in the European market, it thus far hasnt had the flattening effect on special-high-grade premiums that consumers initially had hoped.

Zurich-based Nyrstar, which began marketing its European output jointly with Hong Kong-based Noble on Jan. 1, sold special-high-grade zinc cargoes into the Chinese market on a trial basis last year, and has signaled its intent to move additional tonnages out of Europe and into the Asian market in 2014.

A version of this article was first published in AMM sister publication Metal Bulletin.